In one of its most serious moves to combat rival SAP AG, PeopleSoft Inc. this week acquired midmarket competitor J.D. Edwards & Co. for $1.7 billion. The acquisition is only the latest by the Pleasanton, Calif., enterprise resource planning software developer, but according to PeopleSoft President and CEO Craig Conway, it is one of the most critical, as it firmly establishes the company as the No. 2 ERP player, ahead of Oracle Corp. Conway spoke with eWEEK Department Editor John S. McCright about the impact Denver-based J.D. Edwards will have on his company and customers. He pointed to PeopleSofts 1999 purchase of CRM developer Vantive Corp. as an example of how the company can digest an acquisition without alienating that companys existing customer base.
Why is this acquisition good for customers, and what does J.D. Edwards bring that will enable PeopleSoft to expand its market share beyond simply adding the two customer bases together?
This is one of the most compelling mergers in technology history. The reason I say that is because most of these mergers are motivated by a single advantage or a single dimensional advantage and this was motivated by three dimensional advantages: One was market distribution—J.D. Edwards is a leader in the midmarket, PeopleSoft is a leader in the large enterprise market. The second dimension is product. PeopleSoft could pull up into its large enterprise distribution J.D. Edwards manufacturing and distribution expertise; likewise, J.D. Edwards could pull down into the midmarket PeopleSofts HR expertise.
Weve already become the second-largest enterprise application company in the world,and weve done it mostly on service industries—financial service, health care, telecom, government, education. J.D. Edwards has become almost a billion-dollar company based on asset businesses—manufacturing, construction, life sciences, real estate. …
You have a resulting company with a broad family of products going to the broadest distribution and the most number of industries. Customers will get more products and stronger products, more hardware platforms, more databases, more application servers, more Web servers, more infrastructure choices, better service, more geographies. A company that can concentrate its R&D budgets on a common competitor, which is SAP.
More infrastructure parts could be a development drain for PeopleSoft. Arent the synergies less apparent when you have that broad of a development?
It does take extra units of energy, no doubt about it. When you are going to support four databases it takes more energy. It doesnt cost four times as much to support four databases. We have a development tool set that has been built around this heterogeneous technology stack.
The value proposition of PeopleSoft is we allow customers choice. We are the pro-choice enterprise application company. If you are an AS/400 shop and want to become a Unix shop, or if you are and Oracle database customer and you acquire a company that runs on [IBMs] DB2 [database], you dont have to change. That reduction of risk is a competitive advantage that helps people choose PeopleSoft.
Do you expect the technologies from the two companies to be integrated so that you will sell fewer total products; or will you sell two separate product lines?
They will integrate way better. Whether we have a single architecture or two or three, we will maintain the customers investment. The AS/400 customers have no interest, probably, in changing [enterprise architectures]. Likewise, PeopleSofts large enterprise customers do not necessarily re-implement PeopleSoft to get to a common architecture.
The ultimate confirmation that it is attractive to customers to be able to maintain their current environments is SAP. SAP has three architectures: R/2, R/3 and mySAP.com. None of those customers want to go to the other architecture.
We will maintain the investment customers have made in the AS/400 space. It is completely illogical to acquire a company of 6,500 customers and then require them to do something they dont want to do.
[At the end of the technical due diligence done for this acquisition] each team said, “I cant wait to get my hands on the…fill in the blank.” One example is, J.D. Edwards has a method of making its product installable in a couple hours. We never quite figured that out. That is an important part of being successful in the midmarket. We are going to steal that up into the large enterprise. If you steal each others previously competitive advantages and propagate them across your product lines everyone is happier.
How much of the technology can be transferred from one to the other without transforming the PeopleSoft architecture?
Theres a lot less dead ends in architectures than people think. When we used the Vantive architecture blueprint we took it over to PeopleSoft in four months. … Talented developers only need to see the idea.
We still support Vantive customers on the architecture that they licensed the product. What we did was add to the available versions of Vantive the Internet architecture. What came out under the PeopleSoft architecture was a plus plus plus product and yet, no customers investment in Vantive was sacrificed.
SAP is bringing out the NetWeaver integration stack to resolve some of their integration issues. Will you do the same type of thing?
We have an Integration Broker today. You have to give PeopleSoft credit, we have pioneered all of the changes SAP has made in the last five years. That sounds bold or arrogant, but look back at it. PeopleSoft in 1999, after I joined the company, announced the pure Internet architecture. MySAP.com [then] comes out with a light client that still requires some code on the client, by the way. Then PeopleSoft comes out with embedded analytics, then a year later SAP comes out with Business On Board. …
Give SAP credit for seeing a good idea and coming out with their own version. But NetWeaver is essentially a way to make it easier for [SAP] customers to integrate different architectures of their own product.
Thats what [PeopleSoft] Integration Broker was all about before. We were integrating J.D. Edwards and Oracle and SAP already with our Integration Broker framework and putting it all together in the [PeopleSoft] Portal. Will that get better? Ya, I would expect it to get a lot better for J.D. Edwards.
If you keep three different architectures, do you expect the opportunities for cross-selling to be diminished?
No, because you can take advantage of domain expertise without forcing somebody to change architectures. When we acquired Vantive we took the Vantive CRM code and used it as a blueprint and then put it under the PeopleSoft 8 architecture and offered it to our large customers. There are still 800 customers still on Vantive; we didnt force anybody to get off Vantive. All the rest of our 5,000 customers have an additional value available to them in their own architecture.
I would expect that each of these architectures—and I dont know how many there will be, but I do know that anybody that has licensed anything will get their investment protected—they should see a stream of additional value available to them that would not have been available before. Midmarket customers should probably expect to see the PeopleSoft world-class HR [human resources] product line available not by switching architectures but probably on the architecture they already have. Companies do enhancement releases all the time.
If I were a PeopleSoft manufacturing and supply chain [software] customer, which we have about 900, and they got a CD from PeopleSoft that included significant enhancements based on the J.D. Edwards world-regarded manufacturing and supply chain [technology], Id be pretty happy.
How long will that take—months after the merger is completed or a year or more?
You should expect a steady, continuous stream of enhanced capability that starts to cross-pollinate within months. In Q3 we are going to have a briefing on some of what we expect to be the significant additional value we can bring to customers.
How will you keep the merger-related disruptions to your business to a minimum?
The biggest challenge is internal disruptions—the coders and the people that sell and market. Ten years ago there was a high mortality rate in these acquisitions because there wasnt a great deal of deliberate planning. Today, if you look at the HP and Compaq merger, that was a case study in planning out a merger in such a way that as soon as it was completed they had a lot of action items in place.
PeopleSoft is no stranger to acquisitions. Can we expect to see more in the coming year?
Yes, you will see more acquisitions, but not of this size.
What will the enterprise software industry look like a year from now?
Fewer providers with broader product lines. As the industries mature, customers start to look to an underlying architecture at the level of the stack. They did that at in hardware—there are only three [computer] hardware companies left, there are three operating systems left, there are three database systems left. I think the enterprise software space is no different than any other industry. Customers look to a fewer number of broader providers.
I dont think it is the death of small [software developers], by the way. The exit strategy for small companies has changed, but I dont think the potential for small companies has changed. Its like the pharmaceutical industry: Merck can throw a lot of money at R&D, but every once in a while they spot some little drug development company that has developed some drug that is getting closer to clinical trials and they pay them a lot of money. Thats what the enterprise software space will be. Companies like PeopleSoft will pour way more R&D into a product line than any five or 10 companies could have, but Ill guarantee you that half a dozen times a year PeopleSoft will spot something that it didnt do and go pay some money.
How much market share are you going to gain on SAP in the next year?
I dont have a goal, but we have made this a financial no-brainer. How many other times has there been an acquisition like this that only requires $80 million of growth or $80 million in cost savings? You had to notice this week is the industry analysts have been totally supportive. The reason is it makes a lot of sense and PeopleSoft has emerged as the first credible, broad, financially stable, aggressive competitor to SAP.
Where will the $80 million in savings come from?
We certainly wont cut sales forces because we address completely different industries and markets. There is no chance we are cutting sales, there is no overlap. There is enormous cost savings all over the place. The obvious one is facilities—we are in all the same cities.
How much J.D. Edwards management will you keep around?
The last two weeks of these two companies coming together were spent securing the 200 highest-rated executives at J.D. Edwards.
Is J.D. Edwards going to keep its name?